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Moody’s Economist: Fears About Asia, Europe Are Eroding US Economy

By    |   Friday, 13 July 2012 10:04 AM

There seems to be significant erosion in the Dow Jones Industrial Average and the S&P 500 because of worry regarding what has been happening overseas, John Lonski, chief economist of Moody’s Capital Markets Group, told Fox Business Network.

China's gross domestic product (GDP) expanded 7.6 percent for the second quarter from the same period a year ago, a decrease from growth of 8.1 percent in the first quarter, The Associated Press reported. In addition, China’s retail sales and factory output growth slowed in June.

“We never cared about [China’s GDP] in the past,” Lonski stated.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

Although China does import quite a bit more than in the past from the United States, it is still a producer nation, not a consumption nation.

“The reality is that U.S. exports to emerging market Asia, including China and India, well-exceed U.S. exports to Europe,” Lonski stated. “And oddly enough despite all this bad news about Europe, what we find is that for the first five months of this year, U.S. exports to emerging market Asia have grown more slowly than exports to Europe.

“So, there is something under way in East Asia that is not in the best interest of the U.S. economy or the global economy,” he added.

While trade deficits actually reduce U.S. GDP growth, “we don't want to forget about the fact, however, that a lot of the imports that we get from China are actually manufactured by U.S. multinational production facilities.”

Although some are upset that the Federal Reserve didn’t declare the third round of quantitative easing or something even bigger at their last meeting, Lonski noted that there was not much the Fed could actually do.

“The Federal Funds rate is at 0 percent, the 10-year Treasury is at 1.5 percent. They should give money away. Drop it from a helicopter. Maybe that's what they have to do,” he stated, adding that the 30-year mortgage yield is at 3.5 percent, the BAA corporate bond yield is the lowest since 1965 and the A bond yield is the lowest since 1958.

“How much more could the Fed do?” he asked.

“But I think it's really sad that not more mention is made of the fact of how little the Europeans, how little the European Central Bank is doing, to stimulate its own recessionary economy. It makes no sense,” Lonski added.

He said he is troubled by the fact people in Europe are upset by the fact that the euro is down to $1.22.

“When given the state of that economy and the weakness of the peripheral economies, the euro probably should be closer to $1.10,” he stated.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

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